FINC 5000

Homework Assignment for Week 2:

Chapter 4:

For Week 2, please turn in the answers to the following questions:

Why is it necessary to know about time value of money concepts? Why can’t you just make judgments about future cash flows based purely on the size of the cash flows?

Cochrane Associate’s net sales last year were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Your bank offers a savings account that pays 3.5% interest, compounded annually. How much will $500 invested today be worth at the end of 25 years?

Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost him to buy such an annuity today?

You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Freedman Flowers’ stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a −28% return. What is the firm’s expected rate of return?

Chapter 6:

Define the Capital Asset Pricing Model (CAPM).

Define “beta” as it applies to common stocks.

Ivan Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. He is in the process of buying 1,000 shares of Syngine Corp at $10 a share and adding it to his portfolio. Syngine has an expected return of 13.0% and a beta of 1.50. The total value of Ivan’s current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Syngine stock?

Martin Ortner holds a $200,000 portfolio consisting of the following stocks:

Stock Investment Beta

A $50,000 0.95

B 50,000 0.80

C 50,000 1.00

D 50,000 1.20

Total $200,000

What is the portfolio’s beta?

Stock A’s stock has a beta of 1.30, and its required return is 12.00%. Stock B’s beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B’s stock? (Hint: First find the market risk premium.)

End of assignment questions

Remember to show all work, either through Word, Excel or keys used on the financial calculator. Answers without work shown will not receive credit.

(See answers to numerical problems on the next page)

Answers to numerical problems:

Question 2: $936.33

Question 3: $1,181.62

Question 4: $2,967.92

Question 5: $2,016

Question 6: $6,744.83

Question 7: $963.213

Question 8: $3,704.02

Question 9: 44.0021

Question 10: $605,183

Question 11: $23,261

Question 12: 9.90%

Question 15: 11.2% – 1.23

Question 16: 0.988

Question 17: 9.21%